Insurance and FoFA costing AMP

In its third quarter cashflow, AUM and wealth protection update, AMP has demonstrated how much of an impact FoFA, as well as bad claims experience, is having on businesses.

Total retail net cashflows on AMP platforms were $567m, more than double the $229m reported in Q3 12. This was offset by net cash outflows from external platforms of $233m.

CEO and managing director Craig Dunn says that the third quarter is typically a softer quarter in terms of net cashflows, but that FoFA reforms have also affected the quarter’s results.

The bank has introduced a temporary vetting process on SOAs of all aligned planners, to minimise the risk of none compliance under the new FoFA regime.

“While we and our advisers have been very well-prepared for FoFA, some of the changes are significant and we want to do everything possible to partner with our advisers and planners to ensure appropriate compliance.

“This temporary approach...negatively affects planner productivity in the quarter just gone,” says Dunn. But he says that most planners have been through the process now.

Dunn also raised grandfathering as another possible issue for soft cashflows, saying that the unintended consequence is preventing many planners from moving licensees. Net cash inflows of $194m in Q3 12 were boosted by practices joining the Hillross network in that quarter.

In the wealth protection business, experience losses were down from the same quarter last year ($24m compared to $37m). AMP says that the results will have an impact on its FY 13 operating results, so it has decided to bring forward its year-end review for those product areas.

National Mutual Life Association (NMLA) income protection lapse experience has continued to worsen, and the bank expects that capitalised loss will be between $40-$50m.

Its incurred but not reported (IBNR) reserves for the group insurance business are expected to increase losses by around $15m, resulting in a total estimated reduction of $55 to $65m in AMP’s final quarter operating results.

“AMP regards improving the performance of the wealth protection business as one of its highest priorities and continues to implement short and medium term actions to improve claims and lapse experience,” the bank said in a statement.

The bank will also review assumptions across the life insurance portfolio at 31 December, which could lead to changes of the embedded value of the business, but are not expected to impact the FY 13 operating results.